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Making Sense of Money

Tax Free Income

Tax Free Income

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Tax free income always sounds good to me!  What do you think?  Everyone loves to pay taxes!  Don’t they?  How would you like to earn tax free income?  Taxes are going up if not now, soon.  It is inevitable!  Here are ten examples of how you can earn extra income tax free!

Buy a Fixer-Upper – You are probably going to buy a house or condominium in the near future.  The price of homes is near the lowest point in years.  You could buy a foreclosure, short sale or the worst house in a good neighborhood and fix it up.  Many years ago, I bought a house which needed a lot of work and saved roughly 25%.  I painted, refinished the hardwood floors, installed new window coverings and sold it three years later for double the original price.  If you lived there for 2 out of 5 years, you can exclude $250,000 in profit ($500,000 on a joint return).

Expense Reimbursement – If your employer pays your expenses, that is tax free to you.  My employer wanted me to travel overseas for business; he paid for my passport and credit card annual fee.  Many employers pay for training, tuition, books, cellular phones and telephone service, internet service, professional memberships, uniforms, and entertaining clients.  All these things are expenses for the company and reimburse employees for expenses which are tax free income.

Credit Card Rewards – You may think of yourself as lucky or it is a chore for you to travel for your company.  Either way, you can collect frequent flier miles, hotel rewards and rental car rewards.  In most cases, you can use those rewards for personal travel or upgrade business travel.  If you travel frequently or infrequently those rewards are in your personal accounts.  It is up to you how you use it.  Using the miles, hotel reward or rental car rewards are tax free.  In many cases there a nominal fees to use them.

Rent your House for 14 Days or Less – Renting your house for fourteen days or less may be difficult unless you do it while on vacation.  If you have a second home, you may rent it for fourteen days or less and the income is totally tax free.  If you live in an area which is in demand such as the beach, a city that tourist visit or in a resort area, this is a definite possibility.

Apartment Manager – When I owned apartment buildings I needed a resident manager.  In all cases, I subsidized the rent for the manager at smaller buildings or a free apartment at a larger building.  The manager in exchange for free rent would collect rent, report problems and do minor repairs.  Since housing costs can represent a large part of any one’s budget, living tax free is a huge benefit.

House Sitting – When we go on vacation, we will have someone stay at our house to water the plants and walk the dog.  We generally pay them for this service; however you can house sit and move from one assignment to the next.  There is a need for this service for a variety of reasons.  You can occupy a house for sales to keep up appearances and make it more marketable.  This an opportunity to avoid housing costs and it is tax free.

Carpool Income – If you run  a carpool, any profit after you r expenses (gas, maintenance) is tax free.  Normally, commuting expenses are not tax deductible.  You have an opportunity to reduce your personal expenses by forming a carpool.  I did this some time ago covering my operating expenses and a portion of my car payment.

Cash Back Credit Card – A cash back credit card allows you to receive a discount on your purchases in the form of a annual check.  Costco (American Express) issues a check to me annually as a rebate on my purchases.  This is tax free and it reduces your expenses.

Go to Work for the Government – You can join the Federal government and after ten years have your college debt  forgiven.  Normally when debt is forgiven it is taxable, however this is a perk for public service.  This is another example of tax free expense reimbursement.

Be a Landlord –You can buy income property such as an apartment building and earn income which can be tax free.  If you invest you r money in income property, you expect to make a profit or return on your investment.  Typically, you will earn 7-10% profit and thanks to depreciation it will be tax free.  “My Journey to Success” describes some of my experience with income property for twenty years where I earned tax free income.  Any profit when I sell was taxed as capital gains.

I described ten examples of tax free income that is available with very little effort.  I personally used seven of these examples.  It is a great way of increasing your income and reducing your expenses.  Taxes will be increasing, this is an excellent way for you avoid higher taxes.  What do you think?  What are you going to do?  Isn’t tax free income good?

Photo by:  John-Morgan

Comments

  1. Nice job on your fixer up’er! I love credit card rewards. I let my points pile up over 6 months or more so I get better value when I draw a reward. -Sydney

    • I routinely use those miles to travel oversea (every other year). It is a great perk.

    • That is true although it only available for traveling employees. In my experience, per diem just covers your expenses.

  5. In the USA you get your student debts forgiven after 10 years of service?  That’s crazy, what incentive would they have to pay them off?  The banks wouldn’t have any incentive either since they could let the interest accumulate and then the government would pay it.  I am a Canadian public servant, so that just seems too good to be true!  

    I currently own a fixer upper for exactly that reason.  The other obvious way would be to invest within a tax advantaged account!

  6. Federal employees still have to make payments for ten years, although the rest of the debt is forgiven. This is supposed to be an incentive for public service.
    In the U.S. tax advantaged accounts only postpones when you pay taxes.

  7. I use the credit card rewards to the max (paying in full each month of course) and will soon be embarking on a real estate deal.  Based on preliminary estimates, we should just about pay no taxes the first several years due to expenses and depreciation.  But then again, if you’re paying taxes on a real estate investment, it just means the cash flow was THAT GOOD since there are many writeoffs.

    • No taxes is just one of the rewards of income property and the other is keeping pace with inflation.

  8. These are great ideas!  I’d be very careful about a fixer-upper unless you are very knowledgeable about the local real estate market.  Things can change while you are fixing it up & leave you with a house you can’t sell.  At that point you could become a landlord if you are able to rent it out.  Just be prepared for that possibility.

    I didn’t know about renting your house for 14 days or less.  If you can take a trip or visit family at that time it works well! 

  9. Man, what great ideas. I’ve been hoping to get started in property management. What tips would you offer to someone looking to just get into the market? One question in particular I have is whether or not it’s important that the property be local. I live in silicon valley where the property is super expensive. I’ve been thinking of buying property in less expensive parts of the country, heck, even a couple hours away but still in CA is way, way cheaper. What are your thoughts?

    • Local is always better! If it is not, you may need property management which is expensive and they will never feel it is as important as the owner. You want to be able to drive by or stop in often. Expensive areas mean you can charge higher rents so don’t shy away from it. It will mean you need more money to buy though. .

  10. I am not suggesting flipping homes which is a risky strategy in real estate. Buying the worst house in a neighborhood that requires fixing up should be a relatively safe deal. Renting it out is always an option.

  11. These are some really great ideas. I have house sat in the past and that worked out great. I even did it as a way to live for one year. Saved me a ton on rent. 
    I also enjoy my reward cards. I have gotten numerous free flights over the years which has helped me save a ton on vacations. 

    • House sitting sounds almost glamorous! Vacant houses, but furnished houses show a lot better if occupied. Over the years, I used my frequent flier miles to go overseas (business or first class) probably 10 times (2 tickets each). Definitely worth the annual fee. .

    • Years ago, I was a landlord of apartments and a shopping center. Ino longer care to have that responsibility and time commitment. Munis are a pretty good way of avoiding taxes.

  13. Great ideas. I have done only 3 of these (cash back, CC rewards and expense reimbursement). I have been looking into house sitting but nothing has panned out yet. CC rewards we use it to the max, easily get 2000-3000$ back every year. We will def. looking into buying a rental property if we ever move away from CA. The amount we are saving for downpayment should buy us a lot more in say, TX.

    • Whether you use cash back or frequent flier miles, it is free (tax free) money. Housing may be less expensive elsewhere, but rents will be less too. Don’t forget appreciation because that is your capital gains (reduced taxes)!

  14. Great tips!  This might not apply to everyone, but if you collect unemployment checks, the first $2,400 is tax free.  If you make money on the side, if it is below $400, you owe taxes, but don’t have to pay self employment tax on it.

  15. Great resource KC. Employer sponsored life insurance pretty much equates to free money also.

  16. I have only used 3 of those options.  I wish my husband and I were ‘handier’, as I would love to fix up some properties and resell.  Prices around Detroit are pretty low, and I think I could definitely pick up some deals.

    Great post KC!

    • No, it just means you need to get a better price and you need to assemble a team of tradesmen. It is possible, but it would take time to put it together. Flipping is risky and there is a cost to holding property until it sells.

  17. If you are collecting unemployment, you are in a lower tax bracket anyway. My understanding of side income, it must exceed $600 to be reportable.

  18. I like this post!

    One quirky thing where I work–I work for the state, and by federal law (they showed me because I was quite upset about this) whenever we are reimbursed for money we spent on a business trip from our post-taxed paychecks, we get taxed AGAIN on that money. Doesn’t that seem outrageous?

    • How are you taxed again? Generally when an employer reimburses you on a paycheck, it is a negative deduction (after taxes). Something seems wrong to me. If that is true, then you would be able to deduct as a business expense which would be incorrect too.

  19. Great list.  I love credit card rewards and not being taxed on them…  hope this doesn’t change anytime soon 🙂  As far as buying a fixer-upper, could be wrong, definitely worth looking into, but I think a friend bought a house and due to other life changing events moved to another area.  My friend and her family waited to sell the house till after two years of owning the house so they wouldn’t be killed by high capital gains taxes.

    • Normally speaking you do not buy a house and move immediately. The exemption is $250,000 ($500,000 for a couple)! It is a great deal! There is the additional requirement of it being your primary residence for 2 out of 5 years.

  20. I have worked for large and medium sized companies and never grossed up reimbursement for expenses..

  21. Great list of examples.  I would also include the cash value of a life insurance policy in your list.  The cash can be accessed in the form of a loan that never needs to be repaid.  It will be paid up by reducing it from the death benefit when the person passes.  Because it is a loan, there are no taxes or interest to pay.  This is an excellent way to create a tax-free fund to use for anything you like such as college expenses, new car, home remodel, etc.

  22. Very true, but it changes what is needed in terms of coverage. Some people may use up the cash value on things that do not matter.